Edited version of private advice

Authorisation Number: 1051586510240

Date of advice: 29 October 2019

Ruling

Subject: Deductions

Question

Are the expenses for the company paid by you on behalf of the business an allowable deduction to you under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Early in the year you were approached by a third party who offered their services as an external contractor to provide bookkeeping and audit services.

You decided to contract the third party and paid an upfront fee.

You wanted to bear the cost of the contracting work yourself in order for your company to remain profitable.

You had regular communication with the contractor until later in the year at which time no work had been done.

The contractor did not do any work and you will now have to do the work yourself with your company bearing the cost.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

·         it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478),

·         there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

·         it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153). In that case, the expenses were not incurred by the taxpayer in earning his assessable income in his capacity as director but rather the income of the company. There is no nexus between the outgoing and the assessable income of the taxpayer in such a case as to characterise the outgoing as incidental and relevant to the gaining of assessable income of the taxpayer.

It should be noted that each entity is a separate legal entity and taxpayer, and that generally a loss or outgoing will not be deductible under 8-1 of the ITAA 1997 unless it is incurred in gaining or producing assessable income (or in carrying on a business for the purpose of gaining or producing such income) for the taxpayer who incurred that loss or outgoing: see Federal Commissioner of Taxation v Munro (1926) 38 CLR 153 at 170 per Knox CJ.

In this case you paid for an expense associated with the business activity of your company in order for the company to remain in a profitable position therefore, because the expense was not incurred in gaining or producing your individual assessable income, it is not an allowable deduction to you.